Are you investing or gambling? There is a fine line between the two. I was driven to write this article after I had to put up with "invest-splaining" from someone I know about why putting a small windfall in New Zealand shares was better than KiwiSaver. She knew this because a friend had "made" a 13 per cent return in just a few months on the NZX.
Never mind that the entire NZX was rising in that short window of time and the friend hadn't realised any gain by selling; never mind that the first $1042 invested in KiwiSaver attracts a 50 per cent return plus investment growth and the friend had invested nothing in KiwiSaver this year; and never mind that every analyst is predicting the stellar returns on the NZX can't go on for long.
My reaction was that this is nothing less than gambling.
Investing is not gambling because you're buying something that has value. Some people, however, gamble with investments.
The signs that an "investor" is gambling are many. The first is the time horizon, says Jeff Stangl, senior lecturer at Massey University. You're expecting that your investment will go up by double-digit figures in months because Uncle Bobby told you over the BBQ that it was a winner.
Another sign is excessive buying and selling. Research in Europe found that patients studied in a gambling disorder unit were sometimes excessive investment traders.
"Like many disordered gamblers, excessive traders of this study experienced a number of small early wins, chased their losses, and ended up (failing)."
Investing on intuition is another sign. Intuition and reading a balance sheet are polar opposites.
Harbour Asset Management's Chris Di Leva points out that professional investors go to incredible depth in analysing investments. They will, for example, interview CEOs, analyse their supply chains and in the case of companies such as A2 Milk go to China and go into detail such as looking at product placement on supermarket shelves and what turnover looks like in reality.
The lone keyboard warrior investor who claims to know more than market experts is investing blind in comparison.
Over-confidence is a failing of the gambler/investors. Multiple studies have found that more than 50 per cent of people consider their ability to invest to be above average.
Another classic behavioural bias of the gambler/investor is the "gamblers fallacy". The human brain believes that past events affect future events causing investors to sell too early or hold on too long.
At the other end of the scale from gambling is investing for the long run, says Stangl. "Pick an (investment) based on fundamentals and forget about it," he says. Business cycles take around five years and a long-term investment horizon might be 10 or more.
Going back to the original question, splitting $5000 among five shares brings in way too much risk, and dealing costs eat into the money, unless you choose the likes of a Hatch, Sharesies or InvestNow which does allow very small investments with very low entry and exit fees.
The concept that investing can be gambling is a double-edged sword. Some think that all investing is gambling and don't invest at all. That's unfortunate for their long-term financial health.
The moral of this story is: Don't believe anyone who tells you they know how to beat the market; start with safer investments; don't extrapolate from the recent past; don't assume you can beat the experts; don't expect markets to continue to go up forever; and accept that analysing complex data is also very different to picking what you think will be sure-fire winners. Gut instincts fail.